Context:
Recently, Volatility Index (India VIX) registered its highest single-day spike ever.
Volatility Index (India VIX):
- A key metric used to measure market volatility and investor sentiment in the Indian stock market.
- Reflects the market’s expectation of volatility over the next 30 calendar days.
- Calculated by – NSE (National Stock Exchange)
- Purpose – Indicates the level of uncertainty or risk perceived by investors.
- Interpretation – A higher VIX value signals increased predicted volatility and market uncertainty whereas a lower VIX value suggests a calmer and more stable market environment.
- Calculation – Based on the implied volatility of NIFTY options by using a mathematical model called Black-Scholes model
- Uses 5 variables including the strike price, market price of the stock, time to expiry, risk free rate and volatility.
- Significance –
- Helps traders and investors gauge market sentiment.
- Useful for risk management and decision-making in volatile market conditions.
Comparison between NIFTY and India VIX:
| Aspect | NIFTY | India VIX |
| Definition | A benchmark stock market index representing the top 50 companies listed on NSE. | A volatility index representing the expected market volatility over the next 30 days. |
| Purpose | Tracks the performance of the stock market through price movements. | Gauges investor sentiment and measures market risk or uncertainty. |
| Calculation Basis | Calculated using the weighted average market capitalization of underlying stocks. | Derived from the implied volatility of NIFTY options using the Black-Scholes model. |
| Nature | Reflects price trends and performance of top stocks. | Represents expected volatility in percentage terms. |
| Interpretation | Higher NIFTY indicates a bullish market; lower indicates bearish trends. | Higher India VIX indicates higher expected market volatility; lower reflects stability. |
Source: ET
Previous Year Question
With reference to India, consider the following statements:
1. Retail investors through demat account can invest in ‘Treasury Bills’ and ‘Government of India Debt Bonds’ in primary market.
2. The ‘Negotiated Dealing System-Order Matching’ is a government securities trading platform of the Reserve Bank of India.
3. The ‘Central Depository Services Ltd.’ is jointly promoted by the Reserve Bank of India and the Bombay Stock Exchange.
Which of the statements given above is/are correct?
[UPSC Civil Services Exam – 2021 Prelims]
(a) 1 only
(b) 1 and 2 only
(c) 3 only
(d) 2 and 3 only
Answer: (b)
Explanation:
Established through a Government of India resolution, CDSL is a non-statutory body.
BSE Ltd. and prominent banks, including State Bank of India, jointly promoted CDSL. The Reserve Bank of India is not involved as a promoter.